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Critical Evaluationof the ProvisionsRelating to CrossBorder Merger underCompanies Act, 1956and Competition

Act, 2002.

KENNETH JOE CLEETUS

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Contents PageNo.

Preface 3Introduction 4Companies Act, 1956 & Cross Border Mergers 5

Companies Act, 2013 & Cross Border Mergers 9

Competition Act, 2002 & Cross Border Mergers 11

Conclusion 19Bibliography 20

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PREFACE:

Mergers and acquisitions are increasingly being used and

getting accepted by Indian business entities as a critical

tool of business strategy. In recent times, with globalization

being the byword of success, cross border mergers are looked

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upon as a one way solution to gaining access to foreign market

and creating an image to compete with big corporates.

The paper try to delve into the details and analyse two

important Indian laws dealing with cross border merger and

upholds the need to facilitate Indian companies to grow and be

globally competitive.

The primary focus of research paper is to understand the

provisions relating to cross-border merger under Companies

Act, 1956 and Competition Act, 2002. It will also cover the

critical analysis of the same. This project addressed the

issue of cross border mergers in the context of the present

regulatory framework, while pointing out the lacunae that need

to be addressed.

CROSS BORDER MERGER - AN INTRODUCTION:

A merger refers to combination of two or more companies,

generally by offering the shareholders of one company,

securities in acquiring company in exchange for surrender of

their shares. A cross border merger as the name suggests,

refers to combination of two or more companies belonging to or

registered in different countries. For example, when a UK

company mergers into an Indian company or an Indian company

merges into a UK company, a cross border merger is said to

have taken place.

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In simple words, Cross border mergers and acquisitions means

an agreement to buy or work together with the company of other

country. It is challenging deal than any mergers and

acquisitions under the border of any country.

Cross border merger is one way solution to gaining access to

foreign market, global resources1 and creating an image to

compete with big corporate. Cross border merger is just not

merging the business activities but merging in all ways like

crossing of different cultures, different attitudes, habits,

likes and preferences and many more or in other words in

language of biology it is a kind of hybrid of domestic and

foreign corporates.

According to united nations there were 1660 cross border

merger worth US$5.285 trillion and the number is increasing .

Certain significant cross border mergers are Daimler -

Chrysler, BMW - Rover, Ford - Jaguar - Volvo - Mazda, Renault

- Nissan, SKB - Glaxo - Beacham - Smithkline - Beckman,

Vodafone - Airtel, CIBA - Sandoz, Unilever - Best foods - Ben

& Jerry’s and many more.

Today, more than ever, India is witnessing a number of cross-

border Mergers and Takeovers. Foreign companies being merged

into Indian companies, Indian companies taking over Foreign

companies, and Foreign companies taking over Indian companies

are all becoming everyday news. With such a plethora of cross-

border transactions taking place, it is essential to consider

the legal aspects of these deals.1 technology and skilled people

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Mergers are governed by a tight regulatory frame work in

India. A merger is required to comply with multiple

regulations, non-compliance of which may lead to penalties or

even civil prosecution under these regulations. When it comes

to cross border merger, the number of regulations requiring

compliance increase two fold, considering the fact that

regulations of more than one country governs such merger.

A merger involves transfer of assets by one company to

another, therefore cross border mergers are required to comply

with the exchange control regulations of each country which

may not otherwise permit cross border transfer of assets or

may permit subject to specific regulatory approval.

Given the above, it is evident that a cross border merger is

subject to more stringent regulatory requirements from those

between the companies within same jurisdictions. Companies

Act, 1956 and Competition Act, 2002 are two key regulations

governing cross border merger in India and are discussed

elaborately in the following sessions of this paper.

COMPANIES ACT, 1956 & CROSS-BORDER MERGER:

The regulatory framework dealing with mergers in India is

primarily governed by the Companies Act, 1956. Sections 391 to

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394 of the Companies Act, 1956 (the Act), deal with mergers of

companies and provide a complete code for executing a merger2

scheme. After a merger scheme is proposed, the high court

requires a meeting of the concerned classes of creditors,

shareholders and members to be held. If in such meeting the

merger scheme is approved by at least three-quarters of the

concerned classes, the high court grants its approval to the

merger scheme.

The regulations of cross-border mergers under Companies Act,

1956 and issues arising there from can be discussed under the

two broad categories given below:

o Merger of a foreign company into an Indian Company

o Merger of an Indian company into a foreign company

If we consider the above two categories of cross border

merger, the Companies Act, 1956 under the present provisions

of Sections 391-394 only partially facilitates cross-border

mergers, because it only permits a foreign company to merge

into an Indian company and not vice versa.

A restrictive clause, which exists in the form of section

394(4) (b) of the Act, defines the term 'transferee company'

as not including any company other than a company within the

meaning of the Act. Section 3 defines the term 'company' as2 The term 'merger' has not been defined in the Companies Act, 1956. However, a merger falls within the definition of the term 'arrangement'. Section 390(b) of the Act defines the term 'arrangement' as including "a reorganization of share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or, by both these methods".

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being a company which has been formed and registered under the

Act. As a foreign company is not within the ambit of the

definition, a foreign company cannot therefore be a transferee

company. Further, section 394(4)(b) defines the term

'transferor company' as including any body corporate,

regardless of whether it is a company within the meaning of

the Act.

From a combined reading of section 394(4) (b) and section 3 of

the Act, it is clear that a foreign company is excluded from

the definition of 'transferee company'. Thus, in a cross-

border merger, a foreign company cannot be a transferee

company. Consequently, while a foreign company can merge into

an Indian company, the reverse is not permitted under Indian

law. This is intended to ensure that the company that

continues after the merger is an Indian company over which the

Indian regulatory authorities continue to exercise control.

Thus as already explained, the provisions of s.394 would not

apply to a merger of an Indian Company into a Foreign

Company. However, Andhra Pradesh High Court in its decision

rendered in In Re: Andhra Bank Housing Finance Ltd.,3 held that a

body corporate which can be regarded as a 'holding company'

under section 4(5) of the Companies Act, 1956 will come under

the realm of the expression 'company within the meaning of

this act' and will therefore, be eligible to qualify as a

'transferee company' for the purpose of section 394(4) (b) of

the Act. Going by this analogy it should be possible to merge3 (47 SCL 513)

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an Indian company which is a subsidiary of a foreign holding

company into the foreign holding company, which though a body

corporate under section 2(7) of the Companies Act and not a

'company' as defined under the Companies Act, will qualify to

be a 'transferee company' under the Companies Act.

Although allowing the merger of Indian companies with foreign

companies is an international best practice in the laws

relating to mergers and acquisitions, the government has

concluded that merger of an Indian company with a foreign

company would lead to a situation where shareholders of the

Indian company hold shares or other tradable securities in the

foreign company. Allowing this would amount to the migration

of Indian companies to the acquirer’s soil, which the

government is not comfortable with. Therefore, an overseas

company acquiring an Indian firm will have to keep the

acquired company as a subsidiary.

The government, however, is okay with the reverse - that is,

foreign companies getting merged with Indian companies and its

foreign shareholders owning shares in the merged company which

is registered under Indian laws. This is because according to

s.394(4) (b) the transferor company is defined to include any

company, whether Indian or foreign. Hence, as the transferor

company can be a foreign company, the provisions of s.391-394

are applicable. The recent decision of the Andhra Pradesh High

Court in the case of Moschip Semiconductor Technology Ltd.,4 clearly

supports this point. This case dealt with the merger of a4 120 Comp. Cases 108 (AP)

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company incorporated in California, USA with an Indian

Company. The Andhra Pradesh High Court held that in light of

the clear legal position under the Companies Act, there could

be no legal bar for entering into a scheme between a foreign

company and an Indian company.

Sources said that if a foreign company indeed wants to merge

an Indian company with itself, it can first set up a

subsidiary in India and then merge the acquired Indian company

with the subsidiary. Thus, the acquisition of shares in an

India company and the creation of a holding subsidiary company

structure is the only effective route available to foreign

companies seeking to pursue a strategy of inorganic growth in

India. This would however ensure that Indian businesses would

be owned by entities regulated under Indian corporate law.

The decision of the Karnataka High Court in the case of Bank of

Muscat,5 is very relevant. A very interesting issue arose in

this case. The case dealt with the merger of a foreign

banking company which operated in India through a branch. The

registered office of the bank was in Karnataka. However,

pursuant to the provisions of the Companies Act, which

requires all foreign companies to file their documents and get

registered with the Registrar of Companies, Delhi, the company

was registered with the Registrar in Delhi. A scheme for

merger of this foreign company with an Indian bank was

presented before the Karnataka High Court where the company’s

registered office was located. An issue arose as to whether5 (2004) 120 Comp. Cases 340 (Kar)

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the scheme should be presented before the Registrar of Delhi

or Karnataka. The Court held that the scheme was correctly

presented before the Registrar of Karnataka since the test for

determining the jurisdiction was where the company’s

registered office was located and not where the company was

registered.

Apart from all these S.394 requires certain conditions to be

fulfilled by the Transferor Company, subsequent to which the

High Court would grant permission for a merger. In the case of

cross-border mergers since the Transferor Company is foreign

company, it is a moot point as to how the Indian courts would

supervise the Merger Scheme. As in practice Indian company has

to file a petition in Indian courts and foreign company in

foreign courts if required.

If the Indian company in which the foreign company seeks to

acquire shares is listed on a stock exchange, it is necessary

to inform and seek the approval of the Securities and Exchange

Board of India. Also, the shareholding of a company cannot

exceed the sectoral foreign investment cap specified for the

industry, if any.

As Indian law already permits a foreign company to purchase up

to the entire shareholding in an Indian company in most

sectors, there seems to be no apparent justification to

preclude an Indian company from merging into a foreign

company.

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In the case of In Re: Moschip Semiconductor Technology vs. Respondent,6

Surya Rao, J of the Andhra Pradesh High Court observed that in

today's era of globalization, a liberal approach towards

enabling a merger scheme involving an Indian company merging

into a foreign company must be adopted by policymakers. In

order to facilitate cross-border mergers, the court

recommended modifications to Section 394 (4) of the Act to

enable a foreign company to be a transferee company.

The legislative framework of a country should strive to be

simple and business friendly. As referred to in the Moschip

case7, section 1108 of the California Corporations Code

provides for a completely flexible regime, whereby both

domestic and foreign companies are freely allowed to merge

into each other. It is necessary for such a flexible approach

to be reflected in India's legal framework. Needless legal and

regulatory hurdles increase the transactional costs of

business deals, distort market conditions and also deter

investors from bringing funds into the market.

Another area of concern is that the Indian shareholders should

be permitted to receive Indian Depository Receipts (IDR) in

lieu of Indian shares especially in listed companies or

foreign securities in lieu of Indian shares so that they

become members of the foreign company or holders of security

with a trading right in India (especially in listed

companies). Further, in such cases, the shell of such company

6 ibid / (2004) 59 CLA 3547 ibid

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should be allowed to be dissolved without winding up with

court intervention. The present Act does not permit this form

of merger in view of the specific definition of company under

section 390(a) of the Companies Act.

A forward looking law on mergers and amalgamations needs to

permit an Indian company to merge with a foreign company. Both

contract based mergers between an Indian company and a foreign

company and court based mergers between such entities where

the foreign company is the transferee, needs to be recognized

in Indian Law. This was upheld by Irani Committee8 in its report

on company law (in paragraph 22 of chapter X) and had also

recognised that this would require some pioneering work

between various jurisdictions in which such mergers and

acquisitions are being executed/ created. Apart from this, the

Irani Committee also recommended adoption of international

best practices and a coordinated approach while bringing

amendments to the code of merger in the Companies Act.

There has been a steady increase in cross-border mergers with

the increase in global trade. Such mergers and acquisitions

can bring long-term benefits when they are accompanied by

policies to facilitate competition and improved corporate

8 A concept paper was placed on the website of the Ministry sometime in July 2004 with a view to inviting public comment. Based on the responses received and other inputs, the Government (M/o Corporate Affairs) set up a Committee under the chairmanship of Dr. Jamshed J. Irani, in December, 2004for making recommendations on the new comprehensive Companies Legislation for the country. The committee submitted its recommendations in May 2005. Based on the recommendations of the Irani Committee as well as other inputsreceived, the Government is came up with a comprehensive Companies Bill which later turned out to be enacted as Companies Act, 2013.

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governance. Thus by allowing Indian companies to merge into

foreign companies, the Indian economy will also be able to

enjoy the advantages of cross-border mergers in the form of

increased access to foreign capital, economies of scale,

better technical expertise and improved managerial skills.

COMPANIES ACT, 2013 & CROSS BORDER MERGER:

The wait is finally over – The Companies Act, 2013 is just a

step away from being enforced. The Bill which was approved by

Lok Sabha on 18th December 2012 is approved by Rajya Sabha on

08th August 2013 and become an Act after President’s assent

and notification in the Gazette of India.

The new legislation promises to bring easy and efficient way

of doing business in India, better governance, improves levels

of transparency, enhance accountability, inculcating self

compliance and making corporates socially responsible.

The Companies Act, 2013 will replace more than half a century

old Companies Act, 1956 with some sweeping changes including

those in relation to corporate restructurings, mergers and

acquisitions.

When it comes to merger matters, the new Act has enlarged the

scope of cross-border mergers. The new Companies Act 2013,

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retains the welcome changes pertaining to simplification of

the process relating to cross-border merger of companies.

As per the Companies Act, 1956, in case of a cross-border

merger the Indian company has to necessarily be a transferee

company that is, a foreign company is permitted to be merged

with an Indian company and not vice versa. However, as per the

new Act, in a cross-border merger the Indian company can

either be a transferee or the transferor company, that is, a

foreign company is permitted to be merged with an Indian

company and vice versa.

However, in order to exercise effective control over such

transactions, the Government has provided that the foreign

companies should have been incorporated only in such countries

as may be notified by the Central Government from time to

time, and further, the prior approval of the RBI will be

required.

Apart the changes already mentioned the new Act has initiated

many other reforms like - now the payment of consideration to

shareholders of the merging companies can be made in cash or

depository receipts, or partly in cash and partly in

depository receipts or a combination of both. According to the

newly enacted company law the notice of cross border merger or

amalgamation must now be given to not just to CCI but also to

other regulators like SEBI and RBI.

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The major intent of the legislature while drafting the

provisions of the new Companies Act is on one hand, to provide

greater flexibility and ease to the cross border merger

transactions and on the other, to govern the conduct of same.

On the whole, the new act contains some progressive measures.

However, it has subjected mergers & acquisitions to certain

cumbersome regulatory approvals which may be a roadblock for

timely completion of deals.

COMPETITION ACT, 2002 & CROSS BORDER MERGER:

The regulatory framework dealing with mergers in India is

primarily governed by the Companies Act, 1956. However, as it

stands today, it does not deal with the effects of merger on

competition. To this end, the Indian Parliament in 2002

enacted the Competition Act. The Act apart from prohibiting

anti-competitive agreements and abuse of dominant position by

enterprises also regulates mergers.

Prior to the Competition Act, the regulation of mergers was a

domain shared by The Companies Act, 1956 and The SEBI Act,

1992 – with the former securing the interests of creditors and

the latter securing the interests of investors. The regulatory

framework for mergers suffered a huge lacuna with respect to

the legal scrutiny of mergers from the standpoint of the

effect that they would have on the market, market players and

the consumers. This void came to be filled with the passing of

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The Competition Act, 2002 - India’s first effective anti-trust

legislation that was crafted to fulfill this very role.

While the passing of the Act is certainly a much needed step

in bringing the Indian business environment in tune with

international anti-trust standards, the next stage of fine-

tuning the regulatory framework is most crucial if the

legislation is to eventually realise its goal of creating a

perfectly competitive and efficient marketplace

First, some background. The Indian Competition Act ,2002 deals

with the regulation of mergers under Sections 5 and 6 of the

Act (along with acquisitions and amalgamations). Mergers have

been grouped along with Amalgamations and Acquisitions under

the wider category of combinations.9

Section 5 of the Competition Act, 2002 prescribes the types of

mergers, acquisitions and amalgamations that will qualify as

‘combinations’ under the Act by laying down certain threshold

limits in terms of assets and turnover of the combining

entities. Once such a transaction meets the prescribed

threshold under Section 5 it will qualify as a ‘combination’.

Section 6 of the Act requires any ‘enterprise’ or ‘person’

entering into such a combination to give details of the

proposed combination to the commission.

The 2007 amendment to the Act now mandates such a notification

within 30 days of the decision of the parties’ boards of

directors or of execution of any agreement or other document

9 The Act refers to the term combination to mean either an acquisition or merger or amalgamation.

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for effecting the combination. The 2007 amendment has

increased the maximum clearance period for cross border

transactions from 150 to 210 days, during which the merger

cannot be consummated and within which the Competition

Commission is required to pass its order with respect to the

notice received. After 210 days, in the event of the

Competition Commission failing to pass an order, the

combination is deemed to be approved. Such a notification is

must even when one of the contracting parties has a

substantial presence in India.

The Act under section 6 prohibits combinations that are likely

to cause an ‘appreciable adverse effect on competition’ and

deems such combinations void. In determining whether the

proposed combination threatens an ‘appreciable adverse effect

on competition’, the Competition Commission is required to

have due regard to the factors listed in Section 20(4) which

include actual and potential level of competition through

imports in market, barriers to entry in market, level of

combination, degree of countervailing power in the market,

likelihood of the combination significantly increasing prices

or profit margins, extent of effective competition likely to

sustain in a market, substitutes available in the market,

market share of person/ enterprise individually and as a

combination, likelihood of removal of effective competitor,

extent of vertical integration in the market, possibility of a

failing business, extent of innovation, contribution to

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economic development, outweighing of adverse impact by

benefits of combination.

On finding a combination to have ‘appreciable adverse effect

on competition’, the Competition Commission is empowered under

Section 31 to direct the combination not to take effect or

propose appropriate modification to the combination.

The Act shows leniency in allowing the parties to propose

amendment to the modification within 30 working days. However,

such an amendment proposed by the parties will be subject to

further approval by the Commission.

However, the Commission is not empowered to initiate any

inquiry into any combination after the expiry of one year from

the date on which such combination has taken effect.

Last but not the least, section 32 of the Act allows the CCI

extra-territorial jurisdiction to examine a combination

between parties outside India and pass orders against it

provided that it has an ‘appreciable adverse effect’10 on

competition in India. This power is extremely wide and allows

the Competition Commission to extend its jurisdiction beyond

the Indian shores and declare any qualifying foreign merger or

acquisition as void.

The above effectively summarises the envisaged merger

regulatory framework under the Competition Act. The above

10 An ‘adverse effect’ on competition means anything that reduces or diminishes competition in the market.

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mentioned provisions of the Act have, to a great extent,

shaped the entire procedure regarding cross border mergers and

acquisitions in India.

Now this paper will attempt to narrow down some of the crucial

issues of the relevant provisions related to cross border

mergers.

First in general, the provisions of Competition Act, 2002 does

not sufficiently differentiate between domestic and cross-

border mergers when it comes to regulation. This is not the

case with anti-trust laws in other jurisdictions. A case in

point will be the anti-trust laws of China. The regulations

called the Interim Provisions on Mergers and Acquisitions of

Domestic Enterprises by Foreign Investors (2003) in China,

specifically cover ‘mergers and acquisitions of domestic

enterprises by foreign investors’. The provisions apply only

to transactions involving foreign parties – covering both

onshore and offshore transactions.

Section 6 of The Competition Act, 2002 deals with assessing

the possible effects of foreign players on competition within

the relevant/domestic market. However, when it comes to

assessing the possible impact on competition, the legislation

makes no distinction between the impact that can brought about

by domestic and foreign players - apart from prescribing

differential thresholds for domestic and foreign companies for

the triggering of mandatory notification (Section 5).

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Section 6 of the Competition Act, considers the combination

have an ‘appreciable adverse effect’ on competition to be

void. But the act does not mention any kind of nexus by which

to identify a cross border merger that has the potential to

result in an appreciable adverse effect on competition. A

reference can be made at this point to a particular test11 that

has been used by the US Courts for merger challenges under the

Clayton Act.

The anti-competitive effects of horizontal mergers and non-

horizontal ones (i,e vertical and conglomerate) vary in

degrees. This difference in horizontal and vertical

associations has been recognised by Section 3 of the

Competition Act which deals separately with vertical and

horizontal associations in laying down the law regarding anti-

competitive agreements. However this distinction between

vertical and horizontal associations has not been recognised

under Sections 5 and 6 in dealing with mergers, amalgamations

and acquisitions.

Anti-trust regulations in other parts of the world have

recognised this requisite distinction between horizontal and

non-horizontal associations in mergers, amalgamations and

takeovers. For instance, the Non Horizontal Merger guidelines

adopted by the European Union in 2007, deal specifically with

such non-horizontal mergers . The guidelines recognise that

non-horizontal mergers are less likely to harm competition

than horizontal mergers. The distinct treatment of non-

horizontal mergers is also followed in the United States where11 The test of direct, substantial and reasonably foreseeable standard.

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the ‘Non horizontal Merger guidelines’ specifically deal with

the same. Therefore, it is imperative that any prospective

Regulations on Combinations recognise this unique nature of

Non-Horizontal mergers and treat them as a class in

themselves, distinct from horizontal mergers.

Another area of concern is regarding the high threshold limits

imparted by Competition Act, 2002 upon cross border mergers. A

cross-border merger transaction to be a combination hit by the

Act must satisfy two conditions before section 6 is triggered,

namely total assets or turnover value of the combined entity

and its territorial nexus with India.

The Act seeks to center the triggering of its applicability on

the asset/turnover test, but there are certain situations as

mentioned below where such an approach may cause inadvertent

consequences.

The threshold limits in the Indian law are relatively higher

than in most jurisdictions. If the merged enterprise formed

after a cross-border merger has assets worth more than $500

million, or turnover more than $1500 million; or the group to

which the merged enterprise belongs has assets worth more than

$2 billion, or turnover more than $6 billion then such

combination will come under the purview of the CCI.

As a consequence of such high threshold limits, many cross-

border transactions, especially those in capital-intensive

industrial sectors such as petrochemical, which do not affect

competition in India per se, will require approval of CCI for

the sole reason that one of the parties involved is large

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enough to exceed the threshold. This may bring even an

inconsequential merger transaction under the scrutiny of CCI,

thereby causing unnecessary delay in its conclusion which, in

turn, hamper the industrial and economic growth.

The rationale behind keeping such high threshold limits is to

reduce the workload of the Competition Commission under the

mandatory notification regime. However, this leads to another

important implication - that of excluding merger transactions

falling below the prescribed thresholds but which nonetheless

cause an appreciable effect on competition in their particular

sector.

Under section 5 it is mandatory for a foreign company with

assets of more than $500 million, which has a subsidiary or

joint venture in India with a substantial investment above

Rs.500 crores, to notify the CCI before acquiring a company

outside India. For e.g. a Japanese automobile company such as

Suzuki, which has a joint venture with an Indian company

Maruti Udyog Ltd., would have to notify the CCI of any merger

or acquisition made by it in Japan, regardless of it having

any effect on competition in India. Regulation of combinations

on the basis of monetary thresholds will unnecessarily subject

a large number of offshore mergers, with little connection to

India, under the radar of the CCI. This requirement not only

acts as a burden on the CCI by increasing its workload but

also has an indirect effect of de-promoting foreign companies

from making investments in India.

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Another pivotal area of concern with respect to cross-border

mergers is the element of extra-territoriality(section 32)

that India's Competition Act, 2002 is required to handle in

its dealing with anti-competitive cross border transactions.

Multiplicity of jurisdictions is one of the key problems of

cross border mergers since there's a possibility of

inconsistent decisions by two different competition

authorities vis-à-vis the same merger transaction. This is

because the principles guiding any competition authority to

determine the effect of any combination vary from country to

country. For instance, the CCI shall have due regard to the

factors enlisted in section 20(4) of the Act12. There may be

instances where the CCI may even permit cross-border

combinations affecting competition, when the economic benefits

of such a combination outweigh its adverse impact, if any.

However, the same transaction may not be allowed by the

corresponding competition authority under whose jurisdiction

the foreign enterprise falls. What may thus be regarded as

anti-competitive in one jurisdiction may not be regarded the

same in another jurisdiction.

Another provision of the Competition Act that is very likely

to create conflict of jurisdiction in cross-border mergers is

section 32, which empowers the CCI to inquire and pass orders

in cases of transactions taking place outside India but having

an effect on competition in India. This is on the basis of

12 There are 14 factors under S.20(4) which should be regarded while determining a combination as anti-competitive or not.

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“effects doctrine”13, according to which states have

jurisdiction over conduct having anti-competitive effects in

their territory even if it takes place in another state. The

Act however, does not throw light on how the said order under

section 32 is to be implemented.

The Act should incorporate necessary provisions for conferring

power on the CCI to seek cooperation from foreign authorities

for implementing its orders with respect to cross-border anti-

competitive practices. As it stands now, section 32 is worded

broadly and allows the CCI to extend its jurisdiction beyond

the Indian shores without any implementation mechanism.

However, the conflict arising out of the above mentioned

situations has not been adequately addressed by the present

Indian competition law. Jurisdictions reviewing the same

transaction should coordinate without compromising enforcement

of domestic laws. This will enhance the efficiency and

effectiveness of the review process and reduce transaction

costs.

One suggestion to resolve the above issue is following a

“Coordinating Agency Model” wherein the various competition

authorities involved in a particular cross-border transaction

cede jurisdiction to a supranational agency. This agency will

conduct investigation and submit recommendations to the local

13 This is better known as the effects test, which now lies at the core of the concept of extraterritoriality.The seeds of the effects test were laid down in the international law by the Permanent Court of International Justice (Precursor to the International Court of Justice) in the Lotus case (France v. Turkey , 1927 P.C.I.J. (ser. A) No. 10, at 16). In this case, the Court rejected the traditional notions of territoriality in jurisdiction and held that a country’s laws would become applicable even for an act that had occurred in a foreign territory, if theeffects of the act could be felt within the territory of the other country.

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authorities involved in the transaction. Such a model will not

only prevent divergent decisions but will also lay down a

harmonizing standard to address the loopholes in various

competition laws.

According to some sources It is also proposed that in order to

enforce the Indian competition law effectively in case of

cross-border combinations, the CCI should enter into bilateral

agreements with other countries pursuant to the power

conferred on it under proviso to section 1814 of the Act. The

object of such agreements is to promote cooperation and

exchange of information between concurrently reviewing

competition agencies. It will also lessen the possibility of

differences between them in the application of their

competition laws. The US-EU Merger Working Group's Best Practices

on Cooperation in Merger Investigations dated September 23, 199115 is

one such example of a bilateral agreement. The major terms of

this agreement cover the timing of the investigations by the

US and EU anti-trust agencies, collection and evaluation of

evidence, discussing their respective analyses at various

stages of investigation etc.

In order to proceed with a combination, according to section 6

of the Act, prior approval of the CCI is required within 30

days of the execution of any agreement or other document for

acquisition or acquiring control. This requirement of a

mandatory notification is burdensome as it increases the work14 S.18 of the act allows the CCI to enter into any memorandum/arrangement with any agency of any foreign country.15 Best Practices for Cooperation in the Merger Cases, available at http://europa.eu.int/comm/competition/mergers/others/eu_us.pdf.

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load of the Commission. Any delay in addressing such a

notification would directly influence the ability of the

contracting parties to execute such an agreement.

Moreover, The terms “agreement” and “other document” in

section 6 are not defined in the Act. The ambiguity in its

meaning may stretch its ambit to also include a Memorandum of

Understanding or a Letter of Intent. Such an interpretation

will be detrimental as it will increase the compliance costs

at a premature stage of negotiations when it is uncertain

whether the transaction will proceed.

The 210 day-review period is troublesome, especially in the

cases where a combination is prima facie not going to have an

adverse effect on competition. It applies to cross border

transactions happening outside India (as already explained in

the case example of Suzuki), where one of the contracting

parties has a substantial presence in the Indian market. Such

a mandate appears slightly restrictive as such a transaction

would not have any economic consequence in India. Moreover,

this review period available to the CCI is longer than in

other foreign jurisdictions, for e.g. in Japan and Germany the

same is one hundred and twenty days. A long waiting period of

7 months for the CCI to grant its approval to a proposed

combination could result in important business decisions of

the merging enterprises to be kept on hold. Foreign investors

who are more familiar with the shorter review period in their

Page | 28

respective countries may perceive this as a hindrance in their

business plans and seek other destinations for investment.

Thus as already mentioned, all such rules and regulations

under Competition Act, 2002 are exhaustive and expensive,

involving large amount of money as well as time.

Finally, the Act limits the powers of the CCI to look into the

combinations after the expiry of one year from the date on

which such combination has taken effect. But a merged entity

may, under certain circumstances, have a detrimental effect on

competition in the long run. In such cases it will be ultra

vires the power of the CCI to regulate the merged entity after

the one year period ends. Adequate changes should be made to

the Act so that the merged enterprise does not adversely

affect competition throughout its life.

CONCLUSION:

The basic purpose behind this research paper has been to

highlight certain ambiguities and pitfalls in India’s

regulatory framework for cross border mergers as it exists

today under the Companies Act, 1956 and Competition Act, 2002

and the same is duly done in previous sessions.

Having said that, cross-border merger is the sign of a vibrant

economy. Its importance can be derived from the fact that they

constitute approximately 70% of the total number of mergers

Page | 29

worldwide. Since past few years,

Indian companies are increasingly acquiring companies

overseas. Companies like Tata Steel, Videocon and Hindalco are

amongst the largest overseas acquirers till date. However,

except a few cases as those mentioned above, no significant

cross border mergers of a foreign company with an Indian

company has come into lime light.

This is because the cross border mergers, which can be an

effective tool available to Indian companies to globalise

business operations is still a tedious task considering the

plethora of regulatory approvals under Companies Act, 1956 and

Competition Act, 2002.

When it comes to Companies Act, 1956 it is a moot point as to

how a merger of an Indian company into a foreign company be

consummated. This is one of the biggest stumbling block to

such cross border mergers.

However, the new Companies Act, 2013 is enacted and deals

effectively with such situations even though it is subjected

to certain cumbersome regulatory approvals which may be a

roadblock for timely completion of deals.

With regard to Competition Act, 2002, its role is similar to

that of an umpire in a match, wherein the parties are large

conglomerates striving for supremacy and dominance in the

industry.

Page | 30

A macro-level overview of the Competition Act shows that it

was drafted with the noble intention of curbing anti-

competitive combinations in the Indian economy. This intention

alone does not lend perfection to the Act as there exist

various loopholes that need to be rectified. The need is to

prohibit mergers and acquisitions which are anti-competitive

and to permit at the earliest such mergers and acquisitions

which are beneficial. The achievement of balance between

prohibition and permission is of utmost importance.

The 2007 Amendment to the Competition Act, 2002, sought to

remove certain flaws from the Act and has succeeded reaching

only halfway, with a lot of other conflicts yet to be

resolved.

For India to be a global player in the field of merger and

acquisitions, the implications of these conflicts on cross-

border mergers under the Competition Act have to be carefully

studied by the legislators and quickly resolved. Indian

markets cannot function in isolation, they need to align

themselves with their investors in an increasingly flat world

and thus the provisions of the Act need to be reviewed with

special emphasis upon foreign investors. Lastly, the Cross

border mergers do not respect any territorial boundaries and

thus, international cooperation is extremely imperative to

effectively deal with cross-border competition problems, if

any.

To conclude, in keeping pace with globalisation, the cross

border mergers should be deregulated or a single window

Page | 31

clearance should be provided to make the cross border mergers

more effective and attractive.

Page | 32

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